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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 21x, you may consider Reynolds Consumer Products Inc. (NASDAQ:REYN) as an attractive investment with its 17.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Reynolds Consumer Products has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Want the full picture on analyst estimates for the company? Then our free report on Reynolds Consumer Products will help you uncover what's on the horizon.
Is There Any Growth For Reynolds Consumer Products?
There's an inherent assumption that a company should underperform the market for P/E ratios like Reynolds Consumer Products' to be considered reasonable.
Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Still, incredibly EPS has fallen 8.0% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 7.6% over the next year. That's shaping up to be materially lower than the 15% growth forecast for the broader market.
With this information, we can see why Reynolds Consumer Products is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Reynolds Consumer Products' P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Reynolds Consumer Products maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Reynolds Consumer Products (1 is significant!) that you need to be mindful of.
If you're unsure about the strength of Reynolds Consumer Products' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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